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What If? Integrated Transport Development: Investing in Our Future

Communities across North America are searching for ways to ensure growth and future prosperity. Many are working their way through a process of establishing a shared vision, making investment commitments, and building a transportation network that fosters mobility and economic development long into the future. This process is essential for our regions to continue to thrive as diverse and growing members of the global community. Big visions are critical to any region’s ability to support growth, and continue to compete in a global marketplace.

World class cities have world class transportation systems. London, Hong Kong, New York —these cities recognized long ago that infrastructure investment is critical to the sustainability and economic success of a region, as well as to the standard of living of its citizens.

Throughout its 127-year history, which started with the design of the first subway in New York City, Parsons Brinckerhoff has gained significant insight into the different approaches taken around the world to finance new transportation investments. I would like to offer some observations from several of the cities where we helped to deliver transformational programs. There is one important conclusion that can be drawn from the following examples: there is no silver bullet that will solve any region’s infrastructure funding questions—each city used a mix of revenue tools to meet the needs of their political environment. A “cut-and-paste” of other cities’ funding programs is simply not possible. One can, however, learn from the funding sources and innovations used in other cities to help develop the right mix.

Hong Kong

Hong Kong provides one of the best examples of how land use, urban development, urban design, and transport investment can be integrated to form a “community investment” portfolio.

The Mass Transit Railway (MTR) Corporation was formed in 1979, and over the last 33 years it has developed a 212-kilometer rail network with 155 stations.Throughout its development Hong Kong’s MTR used a process that was conducive for infrastructure investment, using policies developed to turn what are typically transport investment decisions into community development decisions. Subway stations have thus become a focal point for community activities, and are built to successfully blend into the surrounding environment.

The MTR builds its own stations when expanding the network. It then tenders 99-year leases for development of the air rights on top of and adjacent to the stations. Payments are phased in order to maximize the value capture potential of these locations. The increased revenues are then split between the MTR and the private investors. The MTR is also involved in a wide range of business activities besides its railway operations. These include development of residential and commercial projects, property leasing and management, advertising, and consultancy services.

London

London’s transit agency, Transport for London, received substantial funding
from the private sector for two of its major projects: Canary Wharf and Crossrail.

The extension of London Underground’s Jubilee Line to Canary Wharf brought transit service to a neglected port area east of central London. The project began in 1992, when the private sector agreed to fund $270 million out of the $2.7 billion needed for the extension. This was viewed as a major factor in the success of funding the extension, and ultimately resulted in the Canary Wharf District becoming London’s second largest centre for the financial services industry. 

 

The $20.8 billion Crossrail project provides some indication of the variety of sources used by Transport for London to finance its development program. The project was primarily financed by public sources, but it is interesting to note the role played by developer contributions, here on the order of $1 billion dollars:

  • 39 percent from the UK Goverment

  • 31 percent from the city of London

  • 19 percent from Transport for London (including congestion pricing)

  • 4.4 percent from developers

  • 3.4 percent from the sale of land

  • 3.4 percent from fares 


New York

Turning to New York, the Metropolitan Transit Authority’s (MTA) program relies on a wide variety of funding sources, including state and city taxes and fees, revenue bonds, federal and state funds, surplus toll revenues from MTA-owned bridges and tunnels, and land value capture. The $2 billion extension of the No. 7 Line is an example of how New York is using innovative financing to fund infrastructure investment.

The No. 7 Line Extension, a key element of the Hudson Yards Redevelopment Project on the west side of Manhattan, was financed through the sale of more than $2 billion in bonds. Repayment of the bonds will be made through increased property tax revenues in the area of the redevelopment, a financing method known as tax increment financing (TIF). The project’s financing plan does not draw on the city’s general revenues; the city will continue to receive property taxes covering the original value of the properties in the TIF district. Only taxes from new development and from valuation increases to existing properties will go to pay for the bonds.

TIFs are useful tools, as city governments don’t have to choose between transit improvements and other pressing obligations. Some municipalities only dedicate a portion of the increase in tax revenues to the TIF district, allowing school, police, or water taxing districts, for example, to continue to receive property taxes on actual property values, since these agencies may need to provide education, safety, and utility services to the new developments. In New York City, however, TIFs can be as high as 100 percent of the tax revenues from new development.

Denver

The last example is Denver. Denver is, perhaps, one of the most exciting examples of transit investment today in the US and represents a possible future model for many cities around the world.
 
Denver is one of the most aggressive US cities in expanding its transit system. The first light rail line opened in 1994, and the system now consists of 56 kilometers and 37 stations. Currently, 130 kilometers of new rail and bus rapid transit is under construction or under contract. This will represent $4.7 billion in investments by 2017.
 
A public-private partnership (P3) is being used to fund construction and the provision of services for the redevelopment of Denver’s Union Station. In addition, Denver’s $2.1 billion Eagle P3 Project (including $480 million in private equity investment) provides a model for innovative public-private partnerships in the US. The project will be completed in 2016 and includes parts of two light rail lines, a rail maintenance facility, and portions of a passenger rail line. The federal government is providing 57 percent of the capital funding, and a regional sales tax will provide 22 percent. Private equity investors will provide another 21 percent ($480 million).
 
This project represents the first transit P3 of this size in the US. The Denver Regional Transportation District (RTD) will retain ownership of the assets. The private investors entered into a 34-year agreement which includes a six-year design/build contract and a 28-year contract to operate and maintain the systems. The concessionaire will provide and maintain the rail vehicles for the three commuter rail corridors and operate and maintain everything it designs and builds. Repayment of concessionaire equity is based on availability irrespective of demand.

While it is true that the Eagle Project is an excellent example of a successful P3 procurement, it also underscores that major transit projects in the US require significant financial support at the federal level. The US federal government provided over $1 billion in support for this project.

So How Do These Examples Apply to Your City?

With each new project, new challenges arise for stakeholders, decision makers, and planners. All aspiring world-class regions should review the innovative concepts and means discussed above, to see how they can be applied to their “Big Visions,” including:There is no one funding solution that fits every city’s transit program. The right mix of revenue tools will depend on the political environment and public acceptance of these tools.  

  • Broadening the scope of transit project delivery to include ownership of the surrounding real estate properties and leasing the sites to capture the revenue generation potential;

  • Asking developers to share the cost of transit projects by working in partnership;

  • Using innovative financing mechanisms such as tax increment financing at the scale necessary to fund large transit projects; and,

  • Advocating for the development of significant funding and financial support from national, or state/provincial/regional levels of government.

Furthermore, public campaigns in support of revenue tools to fund transit and transportation would also benefit from lessons learned from other cities’ campaigns:

  • The campaign needs to be structured such that it recognizes key stakeholders and those with the ability to support the initiative.

  • A consistent message needs to be conveyed at all times so that there is no confusion about why it is necessary. Emphasizing the benefits, which will include congestion management and sustainability, helps the public understand the necessity of the project.

  • Touting technical merits alone is not sufficient. The delivery of the campaign needs to be in plain English so that it is readily understood by all audiences.

 

Image Header Source: Metropolitan Transportation Authority (Creative Commons)